Trade Matters – John Rosen

 Guest Blogger John Rosen is the Executive Director of Marketing Consulting Associates based in Westport, Connecticut.  You can reach him at jrosen@mcaworks.com.

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The Doha round is the ongoing series of multilateral talks sponsored by the World Trade Organization aimed at reducing or eliminating international trade barriers among nations.  It is named after the city of Doha, Quatar – where the talks commenced in 2001.  Ed. Note.

 

 Trade Matters – John Rosen

Recently, on September 14, we “celebrated” the fourth anniversary of the Lehman Brothers collapse, generally remembered as the critical event in the 2008 financial crisis:  the moment a “banking crisis,” along with a lackluster stock market and a slowing real economy morphed into a full-fledged “Global Financial Crisis,” a frightening Wall Street crash, and the “Great Recession.”  It may well be true that the Lehman collapse was the key, catalytic event.  As mentioned, that is the way it is solidifying in the collective memory.

 

Economists and policy-makers continue to debate – and will eventually write many theses and books – on the subject of the causes of the crisis that gripped world financial markets in 2008, as well as the run-up and continuing aftermath.  I wish to propose that there was one contributing factor to the crash and aftermath that is significantly overlooked:  the collapse of the Doha Round of trade negotiations on July 29, 2008.  Not the primary, certainly not the only, but just as certainly one contributing factor to the crisis.

To repeat, my thesis is that the collapse of the Doha Round is an overlooked contributing factor to the crash.  Other causes are well-known and documented – the vast, unsustainable bubble in U. S. housing prices preceding the crash, years of “too loose” monetary policy, the subprime debacle, a huge commodities price bubble and subsequent crash, moral hazard, typified by the “Greenspan put,” reinforcement of the “put” by the Bear Stearns bailout in March, 2008, a string of continuing financial institution failures and/or bailouts (Countrywide, Washington Mutual, Merrill Lynch, RBS, AIG, etc.), serious softening of the real economy, disastrous auto sales, etc.  All these, and others, surely fit the definition of “contributing factor” to the financial crisis.  Determining the interrelationships of these factors, as well their relative importance, are subjects best left to professional economists, Ph.D. candidates, finance journalists, and market participants to study for the next several years.  I simply want to be sure that one of the causes that those experts include in their analyses is one which I think is seriously overlooked:  the collapse of the Doha Round of trade negotiations in July of 2008.

So, let’s address this “overlooked contributing factor” premise in two parts:  first, that the Doha Round collapse is overlooked as a key event in that dismal year and, second, the more interesting and presumably more controversial point that the collapse was a contributing factor to the overall financial crisis.

A couple of hours of online research on this topic reveals, as expected, that there are scores of readily-available discussions, Wikipedia entries, more sophisticated and scholarly papers, and timelines regarding the financial crisis.  The timelines are particularly interesting.  Many very detailed and easy-to-access graphic versions exist.  One particularly good one (although it contains and interesting typo, see if you can find it) is from an organization known as DollarDaze.org and is attached.  You will not find any mention of the Doha Round on this otherwise extensive (and colorful) timeline.  Indeed, I could not find a single timeline that included mention of the trade negotiations and their July breakdown.  More detailed, text-only timelines are available online and none, repeat none, include the trade negotiation collapse.  One detailed text-only timeline does, indeed, have an entry for July 30, 2008:  “President signs into law the Housing and Economic Recovery Act (HERA) creating the Federal Housing Finance Agency (FHFA) to regulate Fannie and Freddie.”  Herein lies one of the key premises of this post:  while our leaders and their bureaucrats were running around creating more alphabet-soup agencies to appear to be “doing something,” they were, literally, ignoring something that really could have had a positive impact:  successful negotiation of the trade round.

The New York Times maintains an interactive crisis timeline (http://www.nytimes.com/interactive/2008/09/27/business/economy/20080927_WEEKS_TIMELINE.html), but it begins in September, with the entry, “The credit crisis, which long ago moved beyond its origins in subprime mortgages, began to accelerate in September.”  So, what was causing that acceleration?

There is, of course, a Congressional report, entitled “The Final Report of the Financial Crisis Inquiry Commission,” dated February 16, 2011.  It is 147 pages long.  It is detailed and thorough.  If you search for “Doha,” you find it mentioned not once. Not once.  (You will find 34 entries for “derivatives”).

Looking at the news reports at the time (on or around July 29, 2008), you will also find occasional mention of the failure of the negotiations, but precious little linkage to the larger, then-developing crisis in finance and the world economy.  The DJIA actually rose about 200 points on each of the ensuing two days; the FTSE and Hong Kong exchanges generally fit the same pattern.  Even the Wall Street Journal editorial page – which generally blames the Smoot-Hawley tariff of 1930 for turning a recession into the global Great Depression (blaming the tariff as well for the demise of civilization as we know it, the rise of Communism, Islamist Terrorism, video games, the Designated Hitter rule, global warming, and just about every other bad thing that has happened in the past eighty years or so) made only this tepid comment in its July 30, 2008 editorial on the topic:  “With economic growth slowing and inflation picking up, a successful Doha Round would have been a welcome growth tonic.”  That’s it.

Clearly, the first part of our premise is correct:  the failure of the Doha Round in late July, 2008 is overlooked.  Or, perhaps “overlooked” is an incorrect description; perhaps it really should be ignored, perhaps it wasn’t a contributing factor, the subject to which we now turn.

Let’s start with a return to Congress.  There is a publication from the Congressional Research Service called “World Trade Organization Negotiations:  The Doha Development Agenda,” dated December 12, 2011 (that is, more than three years after the crisis of 2008).  Here is a representative quote from that report:  “In response to the global economic crisis, the G-20 leading economies have repeatedly called for conclusion of the Doha Round as a way to bolster economic confidence and recovery.”  That’s the point:  if you research hard enough, you can find lots and lots of similar quotes calling for successful regeneration of the talks under the general heading of “In response to the global economic crisis….”  That is, after-the-fact use of the crisis to justify or rationalize calls for reinvigorating the trade talks is widespread, but there are no contemporaneous or after-the-fact analyses blaming the failure of the 2008 talks for the larger financial crisis.

This may be simply opportunism on the part of people like Pascal Lamy:  one can find quotes from him in advance of July, 2008 claiming that a successful conclusion of the talks would be critical in “…ensuring that the financial shock would not deteriorate into a far worse economic recession worldwide.”  You can also find quotes from after the September-October crash claiming that a successful trade negotiation would help restore confidence and the economy.  What I have been unable to find is anyone who has gone on record claiming that the collapse of the trade talks contributed to the crash…only scattered advance warnings and ex post claims that fixing the talks would help restore things.

Amity Shales, in her excellent book, “The Forgotten Man,” expends many pages on the 1930 Smoot-Hawley tariff as a contributing factor to turning a recession into the Great Depression.  Quoting from that book:  “Smoot-Hawley provoked retaliatory protectionist actions by nations all over the globe, depriving the United States of markets and sending the country into a deeper slump.”  Ms. Shales remains a vigorous supporter of Free Trade, but I have been unable to find any public comment from her (there may be one, I just haven’t found it) drawing the direct linkage I am making in this post:  the Doha Round collapsed on July 29, 2008, a time of heightened concern about financial markets and the economy in general.  This was followed by wholesale collapses in world financial markets beginning with the seizure of Fannie and Freddie on September 7.  In the event, Ms. Shales co-authored a WSJ op-ed with Douglas Irwin on August 2, 2008 with the basic premise of “don’t’ despair / not to worry.”

Others – Ben Bernanke in his definitive study and Liaquat Ahamed in a more readable, general audience book, for example – maintain that Smoot-Hawley was of only incidental importance to the Great Depression; that the global disaster was almost wholly caused by terrible monetary policy.  Bernanke has promised to never repeat that mistake.  Ergo, QE3.  As a general audience member who found Ahamed’s book much easier going than Bernanke’s, allow me to posit a monetarist spin on my key point that the failure of the trade talks was important:  The collapse of trade talks implies less trade.  Less trade implies not only a lower level of economic activity but a lower velocity of money.  Which implies that supporting or resurrecting a given level of economic activity will require the Fed to print more money.  Ergo, again, QE3; in this analysis as a direct consequence of the failure of the trade negotiations.

Let me conclude with a few facts and a restatement of my premise, simply to avoid any miscommunication.  First, the buildup to the crash in September-October, 2008 was years in the making and had multiple, interrelated causes.  Second, the DJIA peaked at a little over 14,000 in October, 2007, a year before the crash.  It had settled into a range of 11,000 to 13,000 for several months by the time in question, July of 2008.  This indicates that markets, at least, were betting that the worst was over…but they were watching very closely.  Our premise is that the failure of the trade talks in July contributed to a general level of uncertainty and steadily increasing inventory of bad news leading to the September crash.  As noted, the failure of the Doha Round in July did not spark a huge stock sell-off, quite the contrary.  Stocks didn’t start really crashing until September.  What did crash quite concurrently with the Doha talks was the price of commodities.  Oil prices hit their $147 peak (WTI) in that very same July and began their rapid, scary crash down to under $40 by January.  Less trade most certainly does imply less demand for oil, and commodity speculators might certainly want to head for the hills…in response to a trade talks impasse, 30-40 days before everyone else (equity speculators) realizes that the game is up.

Finally, the Doha Round of negotiations has been resurrected, but the outlook is “unclear.”  All sorts of commentators, politicians, bureaucrats, economists, etc., continue to stress the importance of a successful conclusion to this round as a means of re-establishing business confidence and generally resurrecting the world economy.  (See “In response…” above). If it’s so important, now, to complete this round, using the trade agreement to re-establish sustainable global economic growth and prosperity, shouldn’t its failure in July, 2008, be considered at least one contributing factor to the September, 2008 financial crisis?

 

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